Investment Incentives

The State of Israel encourages both local and foreign investment by offering a wide range of incentives and benefits to investors in industry, tourism and real estate. Special emphasis is given to hi-tech companies and R&D activities.

Investment Incentives

Investment incentives are outlined in the Law for the Encouragement of Capital Investment which was recently revised. The new Law differs from the previous one in that it adds a new path for incentives - an automatic one. The incentive programs can be divided into 2 main types:

1) The Grants program - administered by the Israel Investment Center (IIC), a department of the Ministry of Industry, Trade and Labor

2) The Automatic Tax Benefits program administered by the Tax Authorities.

To qualify, investment projects must meet certain criteria including: international competitiveness, minimal designated investment, high added value and registration of the company in Israel.

Once these criteria are met the enterprise gains Approved Enterprise status from the IIC if it chooses the grants program and Preferred Enterprise status by the Tax Authority if it chooses one of the tax benefits programs. It is then eligible for incentives, such as grants of up to 24% of tangible fixed assets (grants program only) and/or reduced tax rates, tax exemptions and other tax related benefits.

Summary of Program Benefits

Grants Program

A.    Investment Grants according to the National Priority Area in which the enterprise is located as per Table 1.

B.    Tax benefits as per Table 2

C.    Accelerated depreciation

Tax programs

         A.  Tax benefits ( see details below)

         B.   Accelerated depreciation

Location

The government grants program is affected in part by the location of the company's activities. Several regions in Israel have been declared National Priority Regions:

Priority Area A includes:

·         The Galilee

·         Jordan Valley

·         The Negev

·         Jerusalem (for hi-tech enterprises)

Priority Area B includes:

·         Lower Galilee

·         Northern Negev

Area C includes the rest of the country.

Grant Program

The amount of the government grant is calculated as a percentage of the original cost of land development and investment in buildings (except in Area C), in machinery and equipment. This cost includes installation and related expenses. The percentages are:

Table 1 - Investment grants table

	Priority Area A*	Priority Area B
Industrial projects Up to NIS 50 million **	24%	10%
Industrial projects Above NIS 50 million	20%	10%
Investment in hotels and other accommodations	24%	-
Other tourist enterprises	15%	-

* Plus an additional grant of up to 8% for companies locating in the south ("Negev Law") and an exemption from company tax for first two years of benefits.

** Or located in low socioeconomic town.

Time to Completion

Under the provisions of the grants scheme, 20 percent of the approved program for industrial projects should be completed within 24 months from the date of approval. The investment program should be completed within 5 years from the date of approval.

Tax Benefits

a) Grant Program

Companies choosing the grant program receive tax benefits as well for a period of  7 consecutive years, starting with the first year in which the company earns taxable income (grants are not considered income).

Moreover an Approved Investment located in Priority Area A is entitled to a complete tax exemption for the first two years.

Tax benefits are determined by the percentage of foreign control: the more foreign control in the enterprise, the higher the benefits. If at least 25% of an Approved Enterprise's owners are foreign investors, the enterprise is eligible for a 10 year period of tax benefits.

See table below (all figures are in %)

Table 2 - Tax benefits table

	Company owned by Foreign Investors				Company that is not an Approved Enterprise
Tax rates by ownership stake (in %)	90 to100	74 to90	49 to 74	Less than 49
Taxable Income (%)	100	100	100	100	100
Company Tax (%)	10**	15**	20**	25	25
Balance	90	85	80	75	75
Dividend  tax: 15% of balance	13.5	12.75	12	11.25	18.75*
Total tax on distributed income (%)	23.5	27.75	32	36.25	43.75

  *  Based on 25% standard dividend tax for controlling shareholder.

** Applicable only if the foreign investor invests at least 5 million NIS.

b) Automatic Tax Programs

There are 3 types of automatic tax programs:

1.  Alternative tax program

2.  Priority area program

3.  Strategic program

1.  Alternative tax program:  A company can choose this program by waiving the project's rights to a grant and will receive complete exemption from corporate tax on its undistributed income, as detailed below.        

Priority Area A:	Priority Area B:	Area C / Central Israel:
10 years of complete tax exemption	6 years of complete tax exemption and 1 year of tax benefits, 4 years for a foreign investor*	2 years of complete tax exemption and 5 years of tax benefits, 8 years for a foreign investor*

* As in table 2

Remark: Should the company decide to pay dividends during a period when the tax exemption is in effect the dividend tax rate will be 15% and the corporate tax rate the company was exempted from (as per the tax benefit table above ) will be payable.

2.   Priority area program:  For companies investing in Priority Area A, benefits include:

a. Corporate tax rate of 11.5%

b. Dividend tax rate of 15%, total tax rate of 24.5%

    For a foreign investor, the dividend tax rate is 4% and a total tax rate of 15%

The benefit period is for 7 years. If at least 25% of the company is foreign owned then the benefit period is 10 years.

A. Greenfield (new) investment- at least 300,000 NIS

B. Expansion- at least 300,000 NIS or an amount equal to the "approved rate" of the productive assets (the higher of the two) as in the table below:

Value of productive assets (mil NIS)	Required investment as % of  the productive assets
Up 140	12%
140-500	7%
500+	5%

3. Strategic program:  This program is intended mainly for large multi-national companies meeting the following criteria: an annual turnover of at least 13 billion NIS and a minimum investment of 600 million NIS in the project itself. Location: Priority Area A

Benefits include:

a.   Corporate tax – 0% (i.e. complete tax exemption)

b.      Dividend tax – 0%

c.      Benefit period – 10 years

Accelerated Depreciation

An Approved/Preferred Investment is entitled to accelerated depreciation on its property and equipment. During the first five-year period of operation these assets, the company may depreciate its assets for tax purposes at 200% of the ordinary rate of depreciation for equipment  and 400% of the ordinary rate for buildings. Depreciation on buildings shall not exceed 20% per annum.

Advanced Rulings; To provide greater certainty, investors choosing one of the automatic tax programs may apply to the Israel Tax Authority for an advanced (or pre-) ruling to ascertain the scope of the benefits he will be entitled to if he meets the investment conditions as stated in the Law.

A Foreign Investment Intensive Company: A company that is 90% foreign owned, which has an approved investment program of at least $20 million and is internationally competitive, will be granted an extra 5 years of tax benefits.